9 July 2004 External T.I. 2004-0070061E5 - Training Allowances

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Are payments under an agreement between an employer and an employee, whereby the employee receives various allowances in exchange for a commitment to continue employment, taxable under 56(1)(n) or as employment income? If employment income, does the CRA's position on employer-paid education costs apply to make the payments non-taxable?

Position: Taxable as employment income, except for the allowance for tuition, which may be non-taxable.

Reasons: The position in IT-470R is not applicable because the allowances are non-accountable and exceed the actual education costs. However, in the case of the allowance for tuition, we may treat the allowance as a reimbursement in certain circumstances.

XXXXXXXXXX T. Young, CA
2004-007006
July 9, 2004

Dear XXXXXXXXXX:

Re: Training Allowances

We are writing in response to your letter of March 26, 2004, concerning the taxation of certain allowances paid by the XXXXXXXXXX (the "University") to physicians who are or will become employees of the University (the "Employees"). We also acknowledge the additional information obtained in our telephone conversations (Young/XXXXXXXXXX). Your letter included a sample contract that you indicated is representative of existing and proposed contracts between the University and various Employees.

Our understanding of the relevant facts is as follows:

? The University, an Employee and the XXXXXXXXXX enter into an Agreement (the "Agreement") whereby the Employee commences employment as a "XXXXXXXXXX" with the University's XXXXXXXXXX a position with an annual salary between $XXXXXXXXXX and $XXXXXXXXXX.

? The Employee is immediately granted education leave without pay to commence a XXXXXXXXXX -year training program in a XXXXXXXXXX specialty at either the University or another university located in a different city (the "Training Program").

? Upon completion of the Training Program, the Employee will continue employment with the University for a period of at least XXXXXXXXXX consecutive years at the University's XXXXXXXXXX. In the event the Employee is not offered a full-time position with the University, the Employee is required to establish a XXXXXXXXXX practise in XXXXXXXXXX (the "City") and practise for a period of at least XXXXXXXXXX consecutive years, while continuing employment as a part-time teacher at the University's XXXXXXXXXX.

? Under the terms of the Agreement, the University will pay the Employee the following allowances (hereafter collectively referred to as the "Allowances"):

? a non-accountable training allowance of $XXXXXXXXXX per annum in lieu of salary (the "Training Allowance"),

? a one-time non-accountable allowance of $XXXXXXXXXX for the cost of relocation from the City to the location where the Employee will participate in the Training Program (the "Relocation Allowance"), and

? a one-time $XXXXXXXXXX non-accountable allowance for the cost of tuition fees to be paid to the particular university where the Training Program is taken (the "Tuition Allowance").

? The amount of the Training Allowance is not based on the expected costs incurred in respect of the Training Program and will likely be greater than those costs.

? The Agreement also acknowledges that the Employee will receive an $XXXXXXXXXX bursary from the XXXXXXXXXX.

You requested our views on the taxable status of the Allowances. In particular, you inquired whether the Training Allowance is scholarship income under paragraph 56(1)(n) of the Act or income from an office or employment under subsection 5(1) of the Act. Further, if the Training Allowance is employment income, you asked if it, or any portion thereof, qualifies as a tax-free allowance for employer-provided training as discussed in paragraphs 18 to 22 of interpretation bulletin IT-470R(Consolidated), Employees' Fringe Benefits. If not, you asked if the reimbursement of actual tuition costs, as opposed to paying the Tuition Allowance, would be non-taxable under the position described in IT-470R.

In your view, the Allowances should not be taxable because the training is taken primarily for the benefit of the University. In particular, you indicate that the purpose of the Allowances is to support the Employee in his or her Training Program, which is taken primarily to benefit the University.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Further, since your query relates to one or more completed transactions, you should refer the matter to your local Tax Services Office to make a determination. However, we are prepared to provide the following comments on each of the Allowances.

Training Allowance

In our view, the Training Allowance is remuneration that must be included in the Employee's income under subsection 5(1) of the Act, and is not within the scope of the Canada Revenue Agency's (the "CRA's") position on non-taxable employer-paid educational costs that is outlined in IT-470R. The position in IT-470R does not apply in situations where the remuneration ordinarily paid to the employee is reduced because of the employer's payment of the training costs. Further, since the Training Allowance is remuneration from employment, we are also of the view that paragraph 56(1)(n) does not apply. Paragraph 56(1)(n) of the Act only includes in a taxpayer's income the total of all amounts received in the year as or on account of a scholarship, fellowship or bursary that are not received by virtue of an office or employment.

Relocation Allowance

Because the Employee does not have to account for the Relocation Allowance, we are of the view that it must be included in income under paragraph 6(1)(b) of the Act. However, the Employee may be able to deduct actual moving expenses under section 62 of the Act.

Tuition Allowance

In our view, the Tuition Allowance must be included in the Employee's income under paragraph 6(1)(b) of the Act. The position in IT-470R generally only applies where the employer directly pays or reimburses the employee for the educational costs. In your letter, you refer to our technical interpretation letter 9910065, dated July 29, 1999, which indicates that, in limited circumstances, non-accountable allowances may be considered non-taxable. This treatment would only apply to allowances that are otherwise non-taxable under the Act, for example, reasonable allowances for related travel costs that are non-taxable under subparagraph 6(1)(b)(vii) of the Act.

If instead of paying the Tuition Allowance, however, the University pays the tuition directly or reimburses the Employee for the tuition, the amount may be considered a non-taxable benefit provided the conditions described in IT-470R are otherwise satisfied. Further, if the University pays the Employee the Tuition Allowance with the requirement that the Employee provide the University with receipts within a reasonable period of time showing that the actual tuition costs incurred exceed the Tuition Allowance, the Tuition Allowance will be regarded as a reimbursement and therefore, be considered non-taxable.

The publications referred to above may be found on our web site at www.cra.gc.ca. We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett, B. Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch